After-Acquired Cause: Employer’s Due Diligence Pays Off

After-acquired cause, by definition, arises when an employer discovers just cause for termination after the employee has been dismissed on a without cause basis. This begs the question: Can an employer assert after-acquired cause when it has reason to suspect just cause prior to the termination, but proceeds on a without cause basis due to the employee’s representations of innocence? The Ontario Court of Appeal has answered affirmatively.

Key Takeaways

As a best practice, employers should fully investigate the possible misconduct before proceeding to terminate employment – the employer can then make an informed decision as to whether to assert cause or not.

As a general rule, in order to rely upon the doctrine of after-acquired cause, the employer cannot have known about the misconduct at the time of the termination. This is because employers are expected to act promptly upon discovering just cause. Otherwise, the employer risks a finding that it condoned, or waived its right to discipline the employee for, the misconduct.

However, employers who exercise due diligence in responding to misconduct may preserve their right to rely on after-acquired cause in circumstances where they suspect just cause, but proceed with termination on a without cause basis due to the employee’s representations of innocence. Exercising due diligence can include advising the employee, in writing, that the conduct is being investigated, investigating the misconduct, and acting promptly to assert cause once it has been established. In circumstances where a without cause settlement package has already been accepted and paid out, employers who have exercised due diligence can move to have the settlement set aside.

Background

From 2007 to 2010, Mr. Markicevic served as Assistant Vice President of Campus Services and Building Operations at York University. Over the course of his employment, Mr. Markicevic misappropriated nearly one million dollars from the University through false invoicing and inflated quotations. Mr. Markicevic used a portion of the fraudulent funds to renovate his personal residence. He also used University employees to perform the renovations, at the University’s expense.

In late January 2010, a whistleblower came forward with allegations that Mr. Markicevic had misappropriated University resources. Mr. Markicevic sent a letter to the President of the University and the University’s General Counsel actively denying the allegations. The University firmly believed in Mr. Markicevic’s integrity, but was of the view that his employment had become untenable because the University had to conduct an investigation into the allegations of financial impropriety.

On February 1, 2010, before the University was aware of the extent of Mr. Markicevic’s dishonesty, it terminated Mr. Markicevic’s employment without cause and negotiated a severance agreement with him. The severance agreement provided 36 months’ gross salary, amounting to $696,166 and contained mutual releases.

In May 2011, the University concluded its investigation into the allegations of financial impropriety. The investigation revealed that Mr. Markicevic devised and carried out numerous fraudulent schemes. In January 2012, the University brought a claim against Mr. Markicevic seeking to rescind the severance agreement, including the mutual releases.

The Ontario Superior Court of Justice set aside the severance agreement, including the release. The court made the following findings:

Mr. Markicevic engaged in fraudulent activities, and in so doing, breached his fiduciary duties as a senior employee of the University;

as a fiduciary, Mr. Markicevic had a positive obligation to disclose the full extent of his fraudulent activity before he entered into the severance agreement. The intentional and material non-disclosure in and of itself entitled the University to set aside the severance agreement;

where one party has induced another party to enter into an agreement by making a material misrepresentation, the principal remedy is rescission. Mr. Markicevic made a material representation to both the President of the University and the University’s General Counsel when he denied any wrongdoing; and

the University would not have paid any severance to Mr. Markicevic, and would not have granted him a Release, had he not made material misrepresentations.

Mr. Markicevic appealed the decision, arguing in part that the court erred in concluding that his misrepresentations of innocence induced the University to enter into the severance agreement and release.

In York University v Markicevic, 2018 ONCA 893, the Ontario Court of Appeal upheld the lower court’s decision and confirmed that a contracting party who is induced to enter into a contract as a result of a fraudulent misrepresentation is entitled to rescission. The Court of Appeal agreed with the lower court’s finding that the University was induced to enter into the agreement by Mr. Markicevic’s fraudulent misrepresentation, stating “it is difficult to imagine circumstances in which an employer acting responsibly would pay three years severance pay to an employee it knew had misappropriated large sums of money from it“.

Gillian Maharaj is an associate in Baker McKenzie’s Toronto office. A graduate of Osgoode Hall Law School, Gillian completed her articles at a leading employment and labour law firm, focusing on human resources law and advocacy. Gillian is also involved in pro bono work. Her experience includes the Family Law Information Clinic at Newmarket Superior Court, the Will Drafting Project with Pro Bono Students Canada, Court Intake work at Scarborough Criminal Court, and the Child Protection Externship at the Children’s Aid Society of Toronto.